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From carbon measurement to the necessary funding for reduction initiatives
Many companies committed to climate action currently stop at measuring their carbon footprint. While this is a necessary first step, it is insufficient to ensure business resilience in the context of a low-carbon transition.
Once the primary emission sources have been identified, how can you establish an effective decarbonization plan?
How do you identify the most relevant actions?
And above all, how do you anticipate the financial resources required to implement your action plan?
A successful climate strategy requires the involvement of all company stakeholders, particularly the finance department, as every change represents either a cost or a savings opportunity. It is therefore essential to translate the impact of decarbonization actions into financial terms and make this information accessible to everyone.
A practical tool is available to decision-makers: the Marginal Abatement Cost Curve, often abbreviated as MACC, for Marginal Abatement Cost Curve.
But what lies behind this somewhat technical name?
What is the Marginal Abatement Cost?
The marginal abatement cost of a decarbonization solution corresponds to its marginal cost—the cost of the last unit produced—relative to the emissions it will help reduce. It is therefore expressed in euros per ton of CO2e emissions reduced, or €/tCO2e.
This concept emerged in the 1990s and was popularized by McKinsey in 2007.
Let’s look at a concrete example. An industrial company wants to install solar panels on its roof to reduce its electricity consumption:
- The installation will cost €80,000, amortized over 20 years, or €4,000/year
- €200 for upkeep, cleaning, and maintenance per year
This represents a total cost of €4,200/year.
- The emissions reduced are estimated at 2 tonnes of CO2e per year.
The marginal abatement cost of this decarbonization action is therefore €2,100/tCO2e.
Visually translating the carbon and financial impact of a decarbonization action plan.
Within a decarbonization action plan, some emission reduction actions will require spending and therefore have a "positive" cost for the company, while others—by changing production methods, energy consumption, or supply sources and quantities—will generate immediate savings for the company and therefore have a "negative" cost.
The marginal abatement cost is a useful indicator for prioritizing decarbonization actions based on their carbon and financial impact, whether positive or negative. It is particularly useful for identifying actions that can maximize greenhouse gas emission reductions for an equivalent level of financial effort.
After calculating the costs of each action, it is important to be able to compare them visually. This is where the marginal abatement cost curve comes in.
On this curve, the various decarbonization actions are represented as rectangles:
- The width of the rectangle on the x-axis corresponds to the emissions reduced, in tCO2e.
- The height of the rectangle on the y-axis corresponds to the marginal abatement cost of the action, in €/tCO2e.
As we have seen, some actions can have a negative cost, such as reducing food waste. To better visualize the actions on the curve, they are generally sorted from left to right according to their marginal abatement cost, from the most financially profitable on the left to the most expensive on the right.
Thus, the MACC allows you to visualize the actions to be prioritized in order to meet the established reduction trajectory, by integrating the financial dimension and not just the carbon one:
- The wider the rectangle for an action, the more that action will reduce the company's carbon footprint.
- The flatter the rectangle, the more attractive the action is to implement for decarbonizing operations at a lower cost.
- The greater the height of an action's rectangle and the further it is toward the bottom (on the left of the graph), the more the action represents substantial savings while having a decarbonization impact.
- The greater this height and the further it is toward the top (on the right of the graph), the more expensive the action will be to deploy.
The MACC and the cost per ton of carbon as a decision-making tool.
The MACC must be updated regularly to account for cost variations and actions already taken.
Within the framework of the French National Low-Carbon Strategy, this tool is used in particular by comparing abatement costs to a Social Value of Carbon avoided (SVC, in €/tCO2eq), which corresponds to the effort that society as a whole is willing to make to reduce greenhouse gas emissions [1]. This value is significantly close to the value of a ton of carbon on the regulated market, approximately €80/tCO2e as of late October 2022. If an action has a lower cost than this SVC, it should be prioritized.
Similar reasoning can be applied within a company, which can set an internal carbon price and decide that all actions with a cost below this price must be deployed because, in the long run, the company will come out ahead. This will be even more relevant when the internal carbon price is truly linked to regulatory constraints for all types of companies.
The limitations of the MACC.
Although it is a very practical decision-support tool, the MACC has its limits. For example, it does not distinguish between the cash flows required each year: does the action require a large initial investment or rather high annual operating costs? It also does not take into account the technical and operational feasibility of the actions.
Furthermore, building a MACC can be laborious because it requires calculating both the cost and the impact of potential actions, with costs that can vary over time and depend on the different entities within an organization.
Relying on a MACC with "fresh" data is, however, necessary to ensure the successful implementation of an ambitious decarbonization plan.
Sources
1. Criqui P. (2021), Abatement costs. Part 1 – Methodology, report by the commission on abatement costs, France Stratégie, June.
2. Quinet A. (2019), The value of climate action. A shadow price of carbon for evaluating investments and public policies, report, France Stratégie, February.
3. CO2: The European carbon market in seven questions - https://www.vie-publique.fr/questions-reponses/282323-co2-le-marche-du-carbone-dans-lunion-europeenne
4. Internal carbon pricing: a timely solution for businesses? - https://www.institutmontaigne.org/publications/prix-interne-du-carbone-une-solution-qui-tombe-pic-pour-les-entreprises